WORLD TRADE  
ORGANIZATION  G/SCM/Q2/BRA/30 
4 May 2011 
 (11-2315) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
SUBSIDIES 
 
Replies to Questions posed by the UNITED STATES1 regarding the  
New and Full Notification of BRAZIL2 
 
  The following communication, dated 2 May 2011, is being circulated at the request of the 
delegation of Brazil.  
_______________ 
 
 
Support Program for the Development of the Pharmaceutical Productive Chain 
(PROFARMA – Innovation ) 
 
Question 1   Can Brazil provide further details on the terms under which the government undertakes equity participation in a company or particip ation in a project's revenues?  How does the 
government assess the risks of funding the company or project when deciding whether to 
provide support under this programme?  
Reply
 
  The terms under which participation is unde rtaken through the subject programme follow 
international market standards.  Companies that request financial support to BNDES must present 
financial statements, as well as information about th eir co-owners and business partners.  Assessment 
of the risk of the company or of the project is instrumental in deciding whether to provide support under the programme.  
Question 2 
 
 Brazil's notification indicates that the pr ogramme "will be due in August 2012."  Does 
this mean the programme will be terminated at that time?  If the programme will be 
terminated, what will happen to loans and government equity in place at that time? 
 Reply
 
  The programme will be terminated in August 20 12.  All the obligations undertaken by that 
time on both sides will remain in place and will be  fulfilled in accordance with the terms of each 
contract. 
                                                     
 
1 G/SCM/Q2/BRA/25. 
2 G/SCM/N/BRA/186. G/SCM/Q2/BRA/30 
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  Capacity Building and Competitiveness Enhancement in Information Technology
 
 
Question 1 
  Can Brazil provide further details on the industries that qualify for an exemption or 
reduction in the indirect Tax on Industrialized  Products (IPI)?  Is there a definition for 
qualifying "information technology goods"?  Is there a more precise definition of the qualifying "raw materials, intermediate goods and material from used packages"? 
 
Reply
 
 
 The industrial sector that qualifies for an exemption or reduction in the Tax on Industrialized Products (IPI) is the one that manufactures informa tion technology goods and commits itself to invest 
in research and development activities in Information Technologies.   
 The definitions of "Information Tecnhology Go ods", according to Article 2 of the Federal 
Decree No. 5.906/2006, and detailed in Annex 1 of the same Decree, are:  
a) electronic components for semiconductor, optoelectronic, as well as their respective 
electronic inputs; 
 
b) machinery, equipment and devices based on digital technology, with functions of 
collecting, processing, structuring, storage, switching, transmission, retrieval or presentation of information, their electroni c supplies, parts and hardware for the 
operation; 
 
c) handsets with drive by wire-handset wi reless microphone, which incorporate digital 
techniques for control; 
 d) portable mobile terminals;  e) video output units (monitors), devoid of  interfaces and circuitry for receiving radio 
frequency signal or composite video, suita ble for operating machinery, equipment or 
devices based on technical Digital Maps (w ith functions of collecting, processing, 
structuring, storage, switching, transmission,  retrieval or presentation of information). 
 
 Regarding the definition of raw material, inte rmediate goods and packing materials, Brazil 
adopts the concept internationally accepted in costs accounting, which comprises the tangible 
materials from which a product is manufactured.  These materials are used to manufacture the information technology goods that qualify for an exemption or reduction of IPI. 
 
Productive Development Policy (PDP
) 
 
Question 1 
 
 Can Brazil provide further details on the nature and terms of the "reduction in the 
indirect taxes PIS and COFINS" mentioned in paragraph 5(a) of the description of this programme?  For example, how much are the se taxes reduced?  How is that reduction 
accomplished?   G/SCM/Q2/BRA/30 
 Page 3 
 
 
  Reply  
  The programmes consist in the reduction of the tax rates levied on imports and acquisitions in 
the domestic market of goods and equipment, includ ing parts and components, used in construction, 
conservation, modernisation, convers ion or repair of vessels regist ered in the Brazilian Especial 
Register (REB).  The rates are reduced to zero. 
 
Question 2 
  Can Brazil provide further details on the nature and terms of the "income tax 
postponement, as a result of accelerated depreciati on" mentioned in paragraphs 5(b) and (c) of 
the description of this programme? 
 
Reply
 
 
 The income tax deferral under the Productive Development Policy is available to the 
automotive and capital goods industries.  It is app lied to the acquisitions of capital goods used in the 
productive process of vehicles and their parts (automo tive sector) or in the productive process of other 
capital goods.    The amount resulting from normal and accelerat ed depreciation cannot exceed the acquisition 
cost of the mentioned fixed assets.  
  The accelerate depreciation is applied to fixed assets acquired between 1 May 2008 and 
31 December 2010.  Question 3 
 
 Can Brazil provide further details on the qua lifications for receipt of the income tax 
postponement mentioned in paragraphs 5(b) an d (c) of the description of this programme?  Is 
there a particular definition of qualifying "capital goods industries"? 
 Reply
 
  The deferral of income tax is related to accelerated depreciation of capital goods acquired 
between 1 May 2008 and December 2010.  Cap ital goods comprise machinery, equipment, 
instruments and devices that have a useful life.  The enterprises that may qua lify for this incentive are 
those that use such goods in the production process. 
 
Investment Funds for the Amazon, the Northeast Regions and the State of Espírito Santo
 
(Finam/Finor/Funres ) 
 
Question 1 
 
 Can Brazil provide further details on the terms under which the government undertakes 
risk capital investments under this programme?  How does the government assess the risks of 
funding the company or project when deciding whether to provide support under this programme? 
 
Reply
 
  According to legal provisions, the coverage of th e investment risk must be built into the cost 
of the financial capital provided with resources of FINOR, FINAM and FUNRES, following market G/SCM/Q2/BRA/30 
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  practices regarding risk cover.  Risk assessment consists in a study of the juridical, technical, 
economic and financial viability of the projects. 
Question 2 
 
 Can Brazil provide further details regarding what types of projects are "considered to 
be relevant to the region" under this program me.  Are there any criteria that govern an 
assessment of whether a project involves "activit ies that foster regional or local development"? 
 
Reply
 
 
 Priority is given to projects related to infr astructure, that create jobs and foster income 
(particularly micro-enterprises), strengthening the advantages and potential of a region.  
Constitutional Funds for Financing the Nort heast, the North and the Midwest Regions
 
(FNE/FNO/FCO ) 
 
Question 1 
 
 Can Brazil provide further details on the terms of the loans under this programme ( i.e. 
how are the repayment periods and interest rates determined)? 
 Reply
 
  The Constitutional Funds aim at promoting so cial and economic development of specific 
macroregions through credits to strategic projects (see  previous answer).  Small and micro enterprises 
as well as micro agricultural producers are prioritized mainly because of the effect of their activity on 
jobs and income of the poorer population.  Basic food production is also a target.  Financial terms of 
the programmes vary according to the socio-economic  revelance of the project.  Annual programmes 
are defined in advance for the appli cation of the resources of each fund. 
 
Programmes Not Notified
 
 
 The United States notes that a number of programmes discussed in the course of previous Brazilian notifications and Trade Policy Reviews remain unnotified in Brazil's latest 
New and Full Notification.  For example, various sections of the Secretariat Report of Brazil's 
latest Trade Policy Review (Rep ort), WT/TPR/S/212, indicate what appear to be notifiable 
subsidy programmes.  As the Report notes,  "The legal framework for production and 
investment is somewhat complex due to the larg e number of tax and incentive schemes."  Brazil, 
however, has not provided the requisite information pursuant to Article 25 of the SCM Agreement or has notified programmes only in part.   These include, but may not be limited to:  
• Special System of Industrial Depots Subj ect to Standardized Control (RECOF) 
• Export-Processing Zones (EPZ); 
• Ministerial Act SECEX No. 12 export-related tax concessions; 
• Low-cost credit through BNDES and other official sources;  G/SCM/Q2/BRA/30 
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  • Law No. 9,826 of 23 August 1999, reducing IPI taxes for the automotive 
industry; 
• State and federal incentives in the Manaus Free Trade Zone (ZFM); 
• Ministry of Science and Technology (MCT) R&D incentive programmes; 
 Moreover, many of these programmes appear to have export performance and/or local 
content requirements.  In this regard, we note th at in its recent Trade Policy Review, Brazil has 
asserted that many of these programmes are consis tent with the SCM Agreement because "their 
financial costs are fully covered, at interest rate s compatible with those of the international 
market."  However, as the Secretariat Report notes with regard to BNDES credit programmes, 
"credit is made available at rates significantly be low market rates, and in  some cases are linked 
to local-content requirements."   Please explain why the programmes listed above  have not been notified to the WTO, 
pursuant to Article 25 of the SCM Agreement.  
Reply
 
  Brazil understands that none of these pr ogrammes are subsidies, as defined by 
SCM Agreement. 
 a) RECOF   This is a type of drawback. It consists in im porting, with suspension of IPI, PIS and COFINS, 
goods to be used in the manufacturing process of products to be exported. 
 b) EPZ   As of November 2008, no EPZ was in operation.  As stated in the last Brazilian Trade Policy Review, no incentives under the Programme have been granted.  
 
c) Ministerial Act SECEX No. 12  export related tax concessions 
  It seems that the question refers to the Ministerial Act SECEX No. 12, 22 June 2007, which regulates the requests submitted to DEPLA, in cases covered by Decree No. 5.831, of 
13 August 2004.  
  Decree No. 5.183/2004 reduces to zero the wit hholding income tax levied on remittances 
overseas, when they are exclusively destined for payments related to the following expenses:  
i) market research abroad, ii) participation in e xhibitions, fairs and similar events, including rentals 
and leases of stands and exhibition sites, iii) adver tisements related to the events mentioned in ii). 
 
 Remittances and payments overseas made by sources located in Brazil are classified by Brazilian tax legislation as income of residents a nd/or domiciled abroad which arise in Brazil.  
Therefore, that income is generally subject to inco me tax incidence in Brazil.  Thus, the taxpayer is 
the resident and/or domiciled abroad and the Brazilia n source is obliged to withhold the income tax on 
behalf of the revenue's beneficiary.  In general,  the withholding income tax paid in Brazil may be 
compensated with the income tax due by the taxpayer in his country of residence or domicile.  Decree No. 5.183/2004 does not confer any benefit pursu ant to Article 1 of the SCM Agreement.  It 
only removes the payer's obligation to withhold the ta x on behalf of the payment's beneficiary.  The G/SCM/Q2/BRA/30 
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  income of the beneficiary is subject to taxati on in the country of residence/domicile, where the 
income tax is fully paid, because there is no withhol ding income tax paid in Brazil to be compensated. 
Secex Ministerial Act No. 12/2007, which establishes rules for the application of requests to DEPLA, 
ensures that the zero rate of withholding in come tax be only applied on cases covered by 
Decree No. 5.183/2004. 
 
d) Law No. 9,826 of 23 August 1999, reducing IPI taxes for the automotive industry   The law refers to regional development programmes for the Northern and Northeastern regions. Only one manufacturer is reported as ha ving availed itself of the programme, which is 
currently under review. 
 e) ZFM   Zona Franca de Manaus (ZFM) is a soci al-economic programme aiming at regulating 
economic activity in northern Brazil.  As such, it al so aims at sustainable development, land use and 
the planning of the occupation and economic utiliza tion of the territory.  Brazil understands it has no 
distortive effects on exports or imports, although some  independent evaluations  have claimed that it 
fosters net imports.  f) MCT/R&D programmes: 
 
 The Ministry of Science and Technology (MCT) R&D incentive programmes were not 
notified because they are not specific programs, i.e., they do not aim at one company or group of 
companies, they are not related to a particular industry or group of industries and they are not regionally oriented.  
 
 Moreover, such programmes are not discriminatory with respect to the origin of the capital of 
companies eligible for benefits. 
 
Question 1 
 
 Please also explain how each of the progr ammes below is consistent with Brazil's 
obligations under Article 3 of the SCM Agreement:  
(a) Ministerial Act SECEX No. 12 tax concessions for certain export-related 
activities; 
(b) Low-cost credit for the purchase of domestic-origin goods through BNDES and 
other official sources; 
(c) State and federal incentives and tax exempt ions for export-oriented activities in 
the Manaus Free Trade Zone (ZFM). 
Reply
 
 
(a) It seems that the question refers to the Secex Ministerial Act Nº 12, 22 June 2007, which 
regulates the requests submitted to DEPLA, in cases covered by Decree No. 5.831, of 13 August 2004.   As stated before, Decree No. 5.183/2004, re duces to zero the withholding income tax levied 
on remittances overseas, when they are exclusively destined for pa yments related to the following 
expenses:  i) market research abroad, ii) partic ipation in exhibitions, fairs and similar events,  G/SCM/Q2/BRA/30 
 Page 7 
 
 
  including rentals and leases of stands and exhibition sites, iii) advertisements  related to the events 
mentioned in ii).   Remittances and payments overseas made by sources located in Brazil are classified by Brazilian tax legislation as income of residents and/ or domiciled abroad arose in Brazil.  Therefore, 
that income is generally subject to income tax inci dence in Brazil.  Thus, the taxpayer is the resident 
and/or domiciled abroad and the Brazilian source is obliged to withhold the income tax on behalf of 
the revenue's beneficiary.  In general, the withhol ding income tax paid in Brazil may be compensated 
with the income tax due by the taxpayer in his country of residence or domicile.   
 Decree No. 5.183/2004 does not confer any benefit pursuant to Article 1 of the 
SCM Agreement.  It only removes the payer's obligation to withhold the tax on behalf of the 
payment's beneficiary.  The income of the benefi ciary is subject to taxation in the country of 
residence/domicile, where the income tax is fully  paid, because there is no withholding income tax 
paid in Brazil to be compensated.  Secex Minist erial Act No. 12/2007, which establishes rules for the 
application of requests to DEPLA, ensures that the zer o rate of withholding in come tax is applied only 
in the cases covered by Decree No. 5.183/2004.  (b) BNDES requests further clarification on pr ogrammes referred to in the question about 
low-cost credits.  
(c) Exported-goods manufactures in ZFM are not subj ect to taxation of consumption. In fact, all 
products exported by Brazil are not subject to the ta xation of consumption.  In Brazil, the taxation of 
consumption of goods occurs in compliance with th e legislation of the federal taxes IPI, PIS and 
COFINS and the state tax ICMS.  The taxes menti oned are indirect taxes that levied on the value 
added in each stage of the production chai n and follow the destination principle. 
 
 As the consumption of goods occurs abroad, th e Brazilian exported-goods are not subjected to 
the consumption tax in Brazil, once they will be subjected to taxation in the country where the 
consumption takes place.  No tax incentive is c onferred to exports of goods manufactured in ZFM, 
because the exemption/non-incidence of the indirect taxes mentioned on exports is part of the logic 
consumption taxation embodied in the legislation as a general rule. 
 
Decree No. 28.104/2001
 
 
 Responding to questions from the United St ates for earlier notification periods, Brazil 
has previously provided information on the Stat e of Rio de Janeiro's Decree No. 28.104/2001.  
We appreciate the information provided by Br azil on Decree No. 28.104/2001.  We would, 
however, appreciate further clarification on th e following questions regarding this decree. 
 Question 1 
 
 Please explain whether this law remained in  effect during the current reporting period 
of fiscal years 2007 through 2008.  Is there an ex piration date or other expected end to the 
application of this law? 
 
Reply
 
 
 Decree No. 28.104/2001 of the Government of  Rio de Janeiro remains in force.  No 
expiration date was established.  G/SCM/Q2/BRA/30 
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  Question 2 
 
 In earlier notification periods, in resp onse to questions about whether soda ash 
producers could be receiving a specific subsidy under this programme, Brazil has stated that there was "presently" no soda ash production in the State of Rio de Janeiro.  Can Brazil 
provide information as to whether there was any soda ash production in the current reporting 
period? 
 
Reply
 
 
 In the State of Rio de Janeiro there has been no production of soda ash since 2006. 
 
"Automatic BNDES" and FINAME  
 
 The United States understands that the "Automatic BNDES" and FINAME financing 
programmes of the BNDES (National Bank for Economic and Social Development) provide 
loans and asset-based financing for the acquisition of new machinery and equipment manufactured in Brazil (or other Mercosur countri es).  Brazil has previously asserted in the 
2004 TPR that these programmes are consiste nt with the Subsidies Agreement because 
"financial costs are fully covered, at interest ra tes compatible with those of the international 
market" and noted that the interest rate charged to  recipients is sufficient to cover the costs of 
both the government and financial institutions  providing the financing.  Based on the 
Secretariat's report in Brazil's latest Trade Policy Review, these programmes appear to be 
contingent upon the use of domestic over imported goods.  Question 1 
 
Could Brazil further describe the terms of financing provided under these programmes?  
Are the interest rates charged under these pr ogrammes above the interest rates the loan 
recipients would have paid on a comparable commercial loan? 
 
Reply
 
 
 The mentioned programmes have no requireme nt for the use of domestic over imported 
goods.  Both are operated through financial agents ac credited by BNDES.  The terms of financing to 
the loan recipient include a sum of costs, which al ways reflect the cost of funding to BNDES, plus a 
financial intermediation rate that c overs the risk of the financial agen t to BNDES, plus the spread risk 
charged by the financial agent and other fees that may be applied. 
  Regarding the second part of question 2, Brazil recalls the statement presented in 
G/SCM/Q2/BRA/12.  Interest rates charged under the FINAME programme are compatible with those 
of the international commercial market.  The same applies to BNDES Automatic. 
 Question 2 
 
 Please describe the requirements under th ese programmes to purch ase domestic goods. 
 
Reply
 
 
 Both programmes provide financing for the ac quisition of machines and equipment, whether 
made in Brazil or imported.  There are no requi rements under these programmes to purchase domestic 
goods.  
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